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Risk Management Technology: How Treasurers Stay Ahead of the Curve

Sponsor: Chatham Financial

The economic events of the last few years have resulted in changes to expectations and demands of CFOs and treasurers. From traditional management of cash and capital, to accounting and reporting, to financial risk management, treasury objectives continue to grow in scope and importance to company performance. Take risk management strategy as an example of expanding challenges and opportunities for treasury teams. A treasury group approaching risk can quickly find itself buried in data and complex analysis, in addition to needs for timely execution, accounting, reporting and most importantly positive results. And all of this is in addition to the long-standing expectation of running a well-oiled finance organization. So, how do progressive CFOs and treasurers successfully manage risk? They employ the right tools.

The right risk solutions come in many forms, starting with internal people and knowledge. At some point, companies may find themselves out-growing the capacity of their in-house resources and turning to third-parties, looking for expertise and technology that will enable their treasury team. It’s here where CFOs and treasurers should consider three key elements: 1) organizational alignment and expertise, 2) silo-crossing processes and 3) technology solutions.

Element 1: Organizational Alignment and Expertise

On the organizational front, financial risk management has typically been the sole responsibility of treasury despite the fact that risks are created throughout an organization – sales, procurement, and M&A activities are just a few examples. CFOs and treasurers understand that to be strategic and efficient, risks must be handled proactively and holistically across organizational borders. This takes the right level of expertise, time, education, organizational buy-in, and socialization of risk management concepts throughout a company. CFOs and treasurers understand the tangible benefits that this will have on strategic risk management, and in doing so, they raise their prominence in an organization by aligning stakeholders towards common goals.

Element 2: Silo-Crossing Processes

Organizational buy-in takes investment of time and energy. The hard-earned gains must be institutionalized and perpetuated through well-crafted implementation of new processes that create a forum to bring together different departments such that risk considerations are discussed in developing business strategies and decisions. For example, a company with both commodity and currency exposure might change risk management from being a more reactionary effort to a program that proactively tackles risk. In order to accomplish this there must be integration with functions such as sales and procurement for regular risk discussion forums.

Element 3: Technology Solutions

Executed well, organizational and process-based changes can have tremendous positive impact on a company, but after the stakeholders are aligned, the necessary expertise is in place, and the organization is ready for change, it’s time to decide the “how.” Technology solutions used in the right circumstances can be a fast-track to concretely demonstrate how data can become insights, how insights can become strategies and how strategy, with the appropriate technology supporting it, can produce fast, competitive-edge results reducing volatility in earnings statements and avoiding errors and restatements.

From Concept to Application

Let’s look at some concrete examples of how risk management technology can provide strategic insights and efficiency. Three business areas stand out: 1) discussions around changing billing currencies, 2) M&A activities and 3) understanding the interaction of commodity and currency risk.

Discussions around manufacturing and sales locations, contract bidding currencies, and procurement / supply-chain choices are likely to occur frequently. For example, firms with a large presence in China for sourcing goods may be faced with the question of whether it makes sense to pay in local currency for some discount relative to paying in USD. Recently, a global paper products company wanted to evaluate the impact of changing the currencies in which it bids for certain large customer contracts in order to be more competitive vis-à-vis local manufacturers who already price in local currencies. This is not a static decision as currencies move all the time. The company’s use of real-time risk analytics technology allowed the CFO and treasurer to work closely with its sales team to evaluate the cost and benefit of these decisions.

Innovative risk management technologies are not confined to the needs of frequent treasury billing processes. In the case of mergers and acquisitions, CFOs and treasurers are involved in a variety of work streams throughout the diligence, financing and post-acquisition integration process. In the early stages of any M&A opportunity, firms often tackle big picture questions around understanding the value of a combined entity relative to the value of the standalone companies. In this vein, CFOs can further explore a key question that is often overlooked in the diligence process: how do currency or commodity risks impact the earnings volatility of the combined entity? The value of being able to do this type of scenario analysis is tremendous. It can allow companies to understand the hidden synergy in a merger, help drive the valuation of the acquisition, and identify where it is most beneficial to close or consolidate operations during the post-merger integration phase.

In this example, a CFO or treasurer can ask the staff to develop a spreadsheet model to strategically understand the impact of the merger on earnings risks. While Excel is a good friend to many, it can also be a great hindrance in these types of processes because of its heavy reliance on brute­‑force man-power, its susceptibility to errors, and its inability to model many “what-if” business scenarios without major reworks. Fortunately, innovative risk management technologies are making it increasingly possible to efficiently assess earning volatilities under different scenarios. A robust risk management platform helps reduce reliance on a brute-force approach. It can also capture complex analytics such as the interaction of currency exposures from merged firms; the effect of different pro-forma forecasts; and the impact of currency volatilities and correlations.

A third example increasingly on the treasury radar is the impact of commodity volatility on earnings, and those digging deeper are looking at the interaction of currency and commodity price swings on earnings rather than evaluating these risks in isolation. As volatile as exchange rates seem, commodity prices tend to be anywhere between 2-5 times as volatile. Commodities also tend to have some degree of co-movement with currencies (Canadian dollar and Australian dollar being prime examples). Best-in-class risk technologies allow a birds-eye view that examines currencies and commodities in a holistic manner, and an ability to generate real-time insights into how best to mitigate risk through strategic changes to sales practices, procurement and supply chain adjustments, and financial hedging programs.

As the roles of the CFO and treasurer continue to expand, those most successful will adopt and become well-versed in financial risk management technology. Utilizing Chatham Financial’s advanced risk management technology executives are able to analyze complex data more quickly than relying on analysts using spreadsheets. It also enables the finance executive to identify, measure, quantify and respond to all aspects of risk in real-time. The technology enables quicker and better-informed business decisions, permitting finance executives to monitor the relevant measures of risk and to analyze the overall impact of certain strategic business considerations. Bringing a combination of deep expertise and sophisticated technology to companies, Chatham Financial enables finance executives to consider risk holistically, not only as a defensive measure, but in a way that positions their organizations to seize business opportunities intelligently.

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